This Is Not A Stock Market Dip – It’s The Beginning Of Another Scary, October Selloff

Forget the stimulus and the election. Monday’s (October 19) stock market decline just confirmed last Monday’s ominous double peak. The attitude last week was, “Everything is awesome!” Now comes its antithesis: “Everything is alarming!”

This fundamentally-challenged stock market is ripe for a reset and retest.

Disclosure: Author is fully invested in cash reserves

To understand this stock market’s risk, focus on its uncertainties

In “Stock Market: Here Comes October With Scary Tricks Aplenty,” I discussed the October uncertainties upon us:

“October’s list of potentially negative surprises is long. The month will see the results of…

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  • The end of some coronavirus shutdown/unemployment protections and benefits
  • The end of the summer seasonal spending and employment
  • The result of the Fed’s inability to produce real economic improvement (see any of Jerome Powell’s recent pleas to the U.S. congress to do something)
  • The flu season joins the coronavirus pandemic
  • The wildfire and hurricane seasons continue
  • The pre-election, political uncertainties reach a boiling point
  • The malaise among banks continues. From The Wall Street Journal article, “Banks Have Lots of Cash, Little to Do With It” (underlining is mine):

‘The banks, a gauge for the broader economy, have signaled they anticipate a longer, deeper recession than they first expected in the spring. Though much of the economy has held up relatively well, the banks say government stimulus and other temporary reprieves have likely delayed the pain, not overcome it. Many lenders are bracing for a wave of defaults.

‘The turmoil has made it hard to see how banks will grow profits, one reason shares have failed to rally along with the market.”

  • Finally, there are the earnings reports, leading off with JPMorgan Chase on Tuesday, October 13, at 8:30 am. They should be much better than last quarter, but the hoped-for growth outlooks might be disappointing.

Unfortunately, since I wrote that article, some of those issues have worsened, plus the list has grown to include the following:

  • Many companies now are extending work-from-home procedures to summer 2021 (i.e., “normality” is 8+ months away)
  • Many companies (e.g., in travel, entertainment and retail industries) are now discussing the coming need to take drastic, survival actions by year-end 2020
  • The financial system is showing signs of stress (e.g., the sizeable downside pressure on commercial mortgage loan credit quality and pricing)
  • The building realization that technology stocks’ outsized index weightings could be driven more by myopic over-valuations than by extraordinary growth opportunities

Finally, there is the seldom discussed, pivotal issue that could upset the apple cart: enormous global public debt

The Wall Street Journal’s article, “Global Public Debt Seen Hitting A Record,” provides the misguided rationale: That debt-financed spending to support people and organizations during the Covid-19 pandemic is good. Not discussed, though, is the debt load burden ($11.7 T currently = 100% of worldwide GDP) that somehow will need to be paid down.

History shows three courses: Taxation (equals recession/depression), inflation (equals destructive economic forces) or a combination (equals “stagflation”). In other words, there is no such thing as a free lunch, even if the rationale is reasonable and compassionate, and all the world’s economists say borrowing to spend is a good thing.

The bottom line: We are not on a happy growth trajectory

The adage of hoping for the best and preparing for the worst describes the best mindset to deal with where we are today. Hoping drove the stock market to its recent peak. Next comes the downside reality. That is when people/investors will wish they had done some preparation.

So, hope, but focus on reality and raise some cash.

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